Infrastructure Key Themes For 2020

Key View: While 2020 will see persistent political risk continue, growth in the global construction sector will accelerate, driven in particular by Asian markets. There will be an increasing focus from city planners to develop infrastructure that provide an alternative to traditional vehicles and Europe will be at the forefront of establishing the policies necessary to direct investment into projects which encourage the development of the low carbon economy.

Improving global economic performance and in particular a robust construction outlook in Asia will see growth in the global construction sector accelerate relative to 2019.

Fitch Solutions growth forecasts and quarterly national accounts data

Global contractors with exposure to high growth markets.

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Europe Leading On Policy-Driven Efforts For Sustainability

Europe will embark on more ambitious, unconventional means to decarbonise the region and co-ordinate investment in green infrastructure. This will provide other regions with an array of tested policy options to consider in their common fight to mitigate climate change.

Share of financing from EU institutions for climate change-related investments

A wave of protests and unrest across the world, elevated trade tensions, the ongoing Brexit process, elections in key markets and the instability of governments in several major countries will translate into high uncertainty globally, in turn weighing on infrastructure investment.

The global construction industry will accelerate in 2020 relative to 2019. Risks are weighted to the downside given political, and geo-political risk uncertainty remains elevated, however, we forecast real growth in the global construction industry’s value of 3.5% y-o-y in 2020, up from an estimated expansion of 2.8% in 2019. Growth across Asia will be the predominant driver of this acceleration, but improving conditions across the North and South America as well as the Middle East and North Africa will also push the global growth figure higher. In total, we forecast an additional USD215bn of value to be created in 2020 relative to 2019, with the global construction sector reaching USD4.9trn in total.

On a regional basis, the expansions East African and North African markets will be the fastest in 2020, registering 8.7% and 8.1% real construction industry value growth respectively. However, both of these regions are actually slowing relatively to 2019, while Asian markets will be accelerating. In particular, the Mekong region’s small but rapidly expanding construction markets are being driven by largely Chinese investments into infrastructure and industry, while South Asia’s largest market India is set to accelerate to see real growth of 7.1% in 2020.

Notable laggards are the Gulf Cooperation Council (GCC) markets, following multiple severe downgrades to our forecasts over the course of 2019 as our expectations for a slowdown became more pressing on the back weaker oil prices and souring construction sentiment. We forecast the six GCC markets will grow on average by 1.3%, dragged down by both regional giants, Saudi Arabia and the UAE.

Asian And African Markets Dominate Top Spots

Cambodia and Myanmar are set to be the fastest growing construction markets globally, with our forecasts for real growth in 2020 at 13.8% and 12.3% respectively. Themes driving growth are similar in both markets, with Chinese investment playing and outsized role through Belt and Road related projects, as well as business establishing manufacturing capabilities in order to capitalise on lower wages than in China.

Greater Focus On Anything-But-Cars Infrastructure For Urban Mobility

We expect the narrative around urban planner’s need to focus less on car-centric investments to gain significant traction over 2020. This trend is underpinned by a growing desire in both developed and developing markets to reduce traffic congestion, which is becoming a significant economic inhibitor in many cities, as well as deal with air pollution alongside broader efforts to alleviate climate change. Though passenger vehicles will still be a major and important mode of transport for many years to come, we expect policies and financing related to alternative transportation methods to become more mainstream. This will materialise through both more investment into traditional public transit systems like metro and bus networks, as well as a growing class of ‘anything-but-car’ networks with more innovative mobility solutions. We highlight notable examples of alternative urban mobility solutions around the world:

Cycling: Cycling infrastructure includes the provision of dedicated cycling lanes, either alongside footpaths or on the side of roads, traffic signaling designed to incorporate bicycle traffic, bicycle parking and storage facilities such as bicycles racks and the modification of other modes of public transport, such as the metro network, to allow for the transport of bicycles. Many cities such as London and Amsterdam already have well-developed cycling infrastructure networks that co-exist alongside traditional road infrastructure. However, many other cities lack substantive, dedicated cycling infrastructure, and cyclists often ride by the side of paved roads, which poses a safety threat for both the cyclist and other road users. Furthermore in some instances, insufficient infrastructure can contribute to commuters opting for cars over bicycles. While there will be continued pressure from vehicle users not to exacerbate existing congestion through the devotion of road space to bicycles, policy moves in most major cities around the world (where weather conditions are conducive) point to a growing prioritisation of cycling, given its ability to address congestion and pollution, as well as improve public health.

E-scooters/Personal Mobility Devices: We previously alluded to the untapped opportunities regarding the deployment of e-scooter infrastructure in urban areas and the growing consideration this infrastructure class will see in urban planning. E-scooters have the potential to alleviate the first-mile/last-mile problem that can deter the public from taking public transport. Many e-scooter operators such as Jump, Lyft and Bird have begun operations across major cities in recent years, whilst growing numbers of individuals are purchasing their own personal mobility devices, creating a need for infrastructure such as docking for charging and protected lanes for their use. The rapid increase in usage of e-scooters in the past year has not been accompanied by investments in required infrastructure, and has contributed to sustained safety concerns regarding their use, especially alongside pedestrians and other road users. As such, several cities such as Paris, Barcelona and Singapore, have moved to limit e-scooter use from footpaths, despite growing recognition of these devices as a convenient, low-emission alternative to other vehicles. With the use of e-scooters expected to continue to grow, investments will be needed in projects such as the expansion of cycling lanes/anything-but-car lanes to accommodate e-scooter commuters.

Metro/Mass Transit: A popular type of mass transit with the potential to greatly reduce passenger vehicular traffic, metro systems are found in most large cities around the world. However, there remains significant untapped demand for metro systems. As developed markets look to reduce carbon emissions, major cities will have to look to expanding their mass transit networks, such as with London’s Crossrail projects. Likewise, megacities in emerging markets will continue to invest in their under-developed or even non-existent mass transit networks, with Jakarta being a notable example having only inaugurated its first line in 2019. Cost is a major impediment for the implementation of these projects, especially for projects requiring tunneling and excavation works. As such, projects in emerging markets will likely continue to require the assistance of foreign governments or private enterprises in financing and construction.

Metro As An Alternative To Cars Is Expensive

Bus Rapid Transit (BRT): BRT systems are seen as alternatives to metro systems for cities with smaller populations, or where geography precludes the affordable development of metros. Aside from a specialised fleet of buses, BRTs require dedicated roads, modified traffic junctions and pedestrian crossways, stations and power infrastructure to function. Most BRT projects are located in emerging markets, such as Columbia, Brazil, Pakistan and Indonesia due to lower costs and the relative ease of implementation relative to metro projects. We have identified Latin America as offering the most potential for BRT growth of any region globally, followed by the Asia-Pacific region. However, depending on thoroughness of project feasibility study and planning, BRT projects have the potential to contribute to traffic congestion and greenhouse gas emissions.

Top Five BRT Projects By Value, USDmn (Pre-Construction)

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Project Name

Value (USDmn)

Size

Unit

Timeframe End

Status

TransMilenio BRT Project - Avenida LA 68, Bogota

941

17

km

na

At planning stage

TransMilenio BRT Project - La Septima, Bogota

800

20

km

na

At planning stage

Metro Manila Bus Rapid Transit (BRT) Project, Metro Manila

788

48.6

km

na

At planning stage

TransMilenio BRT Project - Avenue Ciudad de Cali, Bogota

742

23.8

km

na

At planning stage

Karachi BRT Red Line, Numaish Chowrangi - Model Colony, Sindh

547

26.6

km

2021

Project finance closure

Source: Fitch Solutions Key Projects Database

Europe Leading On Policy-Driven Efforts For Sustainability

The year ahead will see Europe further cement its position as the leading region for policy-driven efforts to steer investments into more sustainable infrastructure assets and projects, with an array of wholesale investment initiatives for green infrastructure and more targeted, unconventional policy proposals for tackling greenhouse gas emissions. Given the global nature of the fight to mitigate climate change, Europe’s efforts will act as a testing ground for climate change-related policies that other regions will need to consider imminently. We, therefore, emphasise the wider implication that these policies will have for global industry in addressing carbon emissions in the long-term.

Ambitions by the European Commission (EC) to enact policy to place the bloc on track to realise carbon neutrality by 2050 will begin to ‘unlock’ investment in green infrastructure within member states, and indeed across the wider region. Primarily, this will entail greater a material increase in the availability of funds for renewable energy assets, low-emission transport infrastructure and investments capable of enhancing the energy efficiency of buildings. The latter area, given that buildings account for around 40% of the EU’s total energy consumption, will be a particular area for investment and will entail both the construction of affordable, energy-efficient housing and the retrofitting of existing buildings’ insulation and heating systems.

Whilst the EU intends to formally enshrine its bloc-wide net-zero emissions target of 2050, we expect reticence and unease in some member states regarding the intensity of these efforts to lead the bloc to fall short of this target. Countries including the Czech Republic, Poland and Hungary have held out against the target’s adoption and appear unlikely to yield on this matter, however we do not see the absence of a legally enshrined target as preventing a substantial uptick in green infrastructure investment across the bloc. Indeed the aforementioned countries, cautious due to their existing reliance on carbon-intensive energy generation, will likely benefit from the availability of funding earmarked to ensure a ‘just transition’; helping member states posed with the greatest challenge to decarbonise.

Impetus Needed To Reduce Emissions Beyond Energy Sector

EU - GHG Emissions By Sector

Source: European Environment Agency

A mainstay of this overarching policy push will be the European Investment Bank (EIB) and its transition towards being a fully-fledged ‘European climate bank’. In our view, this will entail greater willingness for the EIB to finance low-emission projects in anticipation for its Energy Lending Policy update; ultimately offering limited scope for the financing of carbon-intensive projects in the run-up to its implementation from the end of 2021.

More broadly, European institutions will take the lead and begin to explore unconventional policies that will provide future policy options for other regions to implement in their own efforts to decarbonize. As the European Central Bank (ECB), we expect to see growing calls, both internally and externally, for the central bank to provide a preference for green financing or discrimination against carbon-intensive investment holdings in its asset purchase program. Green bonds, loosely defined as debt securities whereby their proceeds are used for investments or projects with an environmental benefit, already feature as part of the ECB’s asset purchase program via its efforts to maintain a well-diversified portfolio. Separately, the EC will assess its remit as to whether it could ease financing conditions to encourage investment in green infrastructure, for example through the easing of capital charges imposed on lending by banks for climate change-related projects. This would ease the cost of capital entailed in green infrastructure investments and thus incentivize investment in this area, though we would offer caution on the wider, downward effects this could have on credit risk.

The EC’s intentions to design and introduce a levy based on the carbon footprint of imported goods exemplifies policymakers’ willingness to explore untested means to decarbonise, and may ultimately require international participation to reach its full effectiveness. A so-called carbon border adjustment would seek to impose a levy equivalent to the amount of CO2 associated with the imported good during its production process, would pose a material increase in the project costs of companies operating in the EU, namely those reliant on imports with sizeable carbon content such as concrete, steel and other building materials.

Political Risks Roll Into 2020 Infrastructure Development

Global political risk has become a persistent threat to infrastructure in the last two years and we expect 2020 to little in the way of a reversal of that. 2020 will see the fallout from the wave of protests and unrest across Latin America, Asia and the Middle East, continued elevated trade tensions, the ongoing Brexit process and elections in key markets. Crucially, while political risk has always impacted infrastructure development, more erratic political outcomes, as well as infrastructure being directly targeted in political discourse, has significantly reduced investor comfort with long-term investment in emerging markets. Reflecting the challenge posed by uncertainty, the Global Economic Policy Uncertainty Index developed by researchers Scott Baker, Nick Bloom, and Steven Davis, covering 20 major economies, puts economic policy uncertainty at its highest level since at least the late 1990s.

Global Protests Underscore Rising, Widespread And Diverse Grievances

Global Economic Policy Uncertainty Index, Current Price GDP

Source: Baker, Bloom and Davis; Fitch Solutions

In particular, popular unrest will be a major challenge to investment in the infrastructure sector, following a wave of mass protests and unrest across the world seen in the final months of 2019. These protests, which have highlighted high levels of popular discontent with governments over a wide variety of issues, have in some cases resulted in the destruction of substantial infrastructure assets while also forcing significant shifts in government positions, weakening perceptions of policy certainty. The infrastructure market in Latin America, which has seen major protests in recent months in a number of markets including Ecuador, Chile, Bolivia and Colombia, will be particularly impacted by a shift in investor sentiment toward the region, given the rising perception that markets are vulnerable to further bouts of unrest. Given the high reliance on private investment for infrastructure development via public-private partnerships (PPPs) and other forms of privately-backed project development, this will pose significant challenges to the advance of infrastructure projects in Latin America.

More broadly we expect uncertainty around policy direction to be a challenge to infrastructure investment in a number of markets. Elections will be a driving factor of such uncertainty in several countries, including most prominently the United States given the potential for significant shifts in policy on a number of key issues including energy and taxation if Donald Trump were to lose the November 2020 election. Weak coalitions will also pose a challenge to governability in key markets over the coming months including Germany, where Chancellor Angela Merkel’s governing coalition appears at risk following a shift to the left in the leadership of the SPD, a key coalition partner.